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# Stochastic Oscillator

Started by ellliottt, Dec 23 2010 06:45 PM

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#1
Posted 23 December 2010 - 06:45 PM

Introduction

Developed by George C. Lane in the late 1950s, the Stochastic Oscillator is a momentum indicator that shows the location of the close relative to the high-low range over a set number of periods. According to an interview with Lane, the Stochastic Oscillator "doesn't follow price, it doesn't follow volume or anything like that. It follows the speed or the momentum of price. As a rule, the momentum changes direction before price." As such, bullish and bearish divergences in the Stochastic Oscillator can be used to foreshadow reversals. This was the first, and most important, signal that Lane identified. Lane also used this oscillator to identify bull and bear set-ups to anticipate a future reversal. Because the Stochastic Oscillator is range bound, is also useful for identifying overbought and oversold levels.

Calculation

%K = (Current Close - Lowest Low)/(Highest High - Lowest Low) * 100

%D = 3-day SMA of %K

Lowest Low = lowest low for the look-back period

Highest High = highest high for the look-back period

%K is multiplied by 100 to move the decimal point two places

Interpretation

The Stochastic Oscillator measures the level of the close relative to the high-low range over a given period of time. Assume that the highest high equals 110, the lowest low equals 100 and the close equals 108. The high-low range is 10, which is the denominator in the %K formula. The close less the lowest low equals 8, which is the numerator. 8 divided by 10 equals .80 or 80%. Multiply this number by 100 to find %K %K would equal 30 if the close was at 103 (.30 x 100). The Stochastic Oscillator is above 50 when the close is in the upper half of the range and below 50 when the close is in the lower half. Low readings (below 20) indicate that price is near its low for the given time period. High readings (above 80) indicate that price is near its high for the given time period. The IBM example above shows three 14-day ranges (yellow areas) with the closing price at the end of the period (red dotted) line. The Stochastic Oscillator equals 91 when the close was at the top of the range. The Stochastic Oscillator equals 15 when the close was near the bottom of the range. The close equals 57 when the close was in the middle of the range.

Fast, Slow or Full

There are three versions of the Stochastic Oscillator available on SharpCharts. The Fast Stochastic Oscillator is based on George Lane's original formulas for %K and %D. %K in the fast version that appears rather choppy. %D is the 3-day SMA of %K. In fact, Lane used %D to generate buy or sell signals based on bullish and bearish divergences. Lane asserts that a %D divergence is the "only signal which will cause you to buy or sell". Because %D in the Fast Stochastic Oscillator is used for signals, the Slow Stochastic Oscillator was introduced to reflect this emphasis. The Slow Stochastic Oscillator smooths %K with a 3-day SMA, which is exactly what %D is in the Fast Stochastic Oscillator. Notice that %K in the Slow Stochastic Oscillator equals %D in the Fast Stochastic

Fast Stochastic Oscillator:

•Fast %K = %K basic calculation

•Fast %D = 3-period SMA of Fast %K

Slow Stochastic Oscillator:

•Slow %K = Fast %K smoothed with 3-period SMA

•Slow %D = 3-period SMA of Slow %K

The Full Stochastic Oscillator is a fully customizable version of the Slow Stochastic Oscillator. Users can set the look-back period, the number of periods to slow %K and the number of periods for the %D moving average. The default parameters were used in these examples: Fast Stochastic Oscillator (14,3), Slow Stochastic Oscillator (14,3) and Full Stochastic Oscillator (14,3,3).

Full Stochastic Oscillator:

•Full %K = Fast %K smoothed with X-period SMA

•Full %D = X-period SMA of Full %K

Developed by George C. Lane in the late 1950s, the Stochastic Oscillator is a momentum indicator that shows the location of the close relative to the high-low range over a set number of periods. According to an interview with Lane, the Stochastic Oscillator "doesn't follow price, it doesn't follow volume or anything like that. It follows the speed or the momentum of price. As a rule, the momentum changes direction before price." As such, bullish and bearish divergences in the Stochastic Oscillator can be used to foreshadow reversals. This was the first, and most important, signal that Lane identified. Lane also used this oscillator to identify bull and bear set-ups to anticipate a future reversal. Because the Stochastic Oscillator is range bound, is also useful for identifying overbought and oversold levels.

Calculation

%K = (Current Close - Lowest Low)/(Highest High - Lowest Low) * 100

%D = 3-day SMA of %K

Lowest Low = lowest low for the look-back period

Highest High = highest high for the look-back period

%K is multiplied by 100 to move the decimal point two places

Interpretation

The Stochastic Oscillator measures the level of the close relative to the high-low range over a given period of time. Assume that the highest high equals 110, the lowest low equals 100 and the close equals 108. The high-low range is 10, which is the denominator in the %K formula. The close less the lowest low equals 8, which is the numerator. 8 divided by 10 equals .80 or 80%. Multiply this number by 100 to find %K %K would equal 30 if the close was at 103 (.30 x 100). The Stochastic Oscillator is above 50 when the close is in the upper half of the range and below 50 when the close is in the lower half. Low readings (below 20) indicate that price is near its low for the given time period. High readings (above 80) indicate that price is near its high for the given time period. The IBM example above shows three 14-day ranges (yellow areas) with the closing price at the end of the period (red dotted) line. The Stochastic Oscillator equals 91 when the close was at the top of the range. The Stochastic Oscillator equals 15 when the close was near the bottom of the range. The close equals 57 when the close was in the middle of the range.

Fast, Slow or Full

There are three versions of the Stochastic Oscillator available on SharpCharts. The Fast Stochastic Oscillator is based on George Lane's original formulas for %K and %D. %K in the fast version that appears rather choppy. %D is the 3-day SMA of %K. In fact, Lane used %D to generate buy or sell signals based on bullish and bearish divergences. Lane asserts that a %D divergence is the "only signal which will cause you to buy or sell". Because %D in the Fast Stochastic Oscillator is used for signals, the Slow Stochastic Oscillator was introduced to reflect this emphasis. The Slow Stochastic Oscillator smooths %K with a 3-day SMA, which is exactly what %D is in the Fast Stochastic Oscillator. Notice that %K in the Slow Stochastic Oscillator equals %D in the Fast Stochastic

Fast Stochastic Oscillator:

•Fast %K = %K basic calculation

•Fast %D = 3-period SMA of Fast %K

Slow Stochastic Oscillator:

•Slow %K = Fast %K smoothed with 3-period SMA

•Slow %D = 3-period SMA of Slow %K

The Full Stochastic Oscillator is a fully customizable version of the Slow Stochastic Oscillator. Users can set the look-back period, the number of periods to slow %K and the number of periods for the %D moving average. The default parameters were used in these examples: Fast Stochastic Oscillator (14,3), Slow Stochastic Oscillator (14,3) and Full Stochastic Oscillator (14,3,3).

Full Stochastic Oscillator:

•Full %K = Fast %K smoothed with X-period SMA

•Full %D = X-period SMA of Full %K

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#2
Posted 22 January 2011 - 05:44 PM

this the main indicator which i used for determined the future movement price, indeed because these are suitable to be a lead indicator. but often between %K and %D occur some false signal,therefore you should make a filter indicator

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#3
Posted 30 March 2011 - 05:20 AM

I know the stochastic indicator very well, it is used to find out when a forex trading pair is over bought or over sold. I do not like to use it because the commodity channel index does the same work as it so i stick to the cci, it is better for me.

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#4
Posted 26 April 2011 - 12:39 AM

I use this indicator in daily chart to determine reversal movement. in my opinion, stochastic shows as powerful indicator than in lower time frame. I already try it also in 30M and 1H time frame where not fully accurate because provide many more of false signal.

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#5
Posted 10 May 2011 - 12:07 AM

stochastic is one reliable indicator as a filter indicator such as the MA crosses and some trend indicators. there is even a strategy that only uses this indicators only. This to me is very suitable for determining oversold and overought a currency pair

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#6
Posted 16 June 2011 - 10:12 PM

remember if this indicator designed in daily time frame and so, trader will found many of false signal appear if use it in low time frame. if want to keep use it low time frame, better change the default setting of period or use it with other indicator.

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#7
Posted 07 July 2011 - 06:28 PM

In most cases, when the Stochastic Oscillator moves from 90 to 80, it suggests a chance to open a SELL position. When it moves from 10 to 20, it indicates a chance to open a BUY position. This is usually profitable. But we have to be aware that something the indicator moves from 90 to 80 before reaching 60-70, when reverse to reach 80 again.

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#8
Posted 09 September 2011 - 03:20 PM

I have been using Stochs as one of my technical indicators and have found that the accuracy level of this technical indicator isquite good as compared to other indicators available. I use the standard setting for stoch and do use it while entering into the market, allowing me to help gain some profits out of my positions.

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#9
Posted 24 December 2011 - 10:51 AM

It looks like most users are applying

it for the wrong reasons. as I mentioned earlier, it is a leading

indicator and it signals the arrival of

the change in trend. I tried to use them in the past but their movement does not suit with my trading style so i skipped it.one must use another indicator to confirm the trend, preferably a lagging one while trading to make the best use of it.

it for the wrong reasons. as I mentioned earlier, it is a leading

indicator and it signals the arrival of

the change in trend. I tried to use them in the past but their movement does not suit with my trading style so i skipped it.one must use another indicator to confirm the trend, preferably a lagging one while trading to make the best use of it.

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#10
Posted 27 January 2012 - 06:23 AM

Yes stochestic indicator is indeed a good one its tell us when there will be a return in the forex market i.e overboght and oversold.

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#11
Posted 27 March 2012 - 12:43 AM

Stoch is another most widely used technical indicators which have proved to provide accurate signals for the traders. I myself use it on my charts and have noticed that it is a useful indicators as it not only helps us to take a position but also tells us if the market instrument is in an oversold or overbought area...

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#12
Posted 19 June 2012 - 11:46 PM

Stochastic Oscillator

A momentum indicator used in technical analysis that shows the location of the latest market close in relation to the high/low range over a set number of periods. Closing levels consistently near the top of the range indicate buying pressure and those near the bottom of the range indicate selling pressure.

See also: Momentum Oscillator

Momentum Oscillator

A momentum oscillator is a technical analysis tool that measures the speed and strength of a price movement by comparing later prices to earlier ones. It is calculated as a percentage of the latest price compared to the price a number of periods ago. It is usually displayed as a line on a chart with a vertical axis representing magnitude and a horizontal axis representing time. The slope of the oscillator is proportional to the speed and strength of the movement. It is used to signal overbought or oversold conditions as well as points at which investors may wish to buy or sell.

A momentum indicator used in technical analysis that shows the location of the latest market close in relation to the high/low range over a set number of periods. Closing levels consistently near the top of the range indicate buying pressure and those near the bottom of the range indicate selling pressure.

See also: Momentum Oscillator

Momentum Oscillator

A momentum oscillator is a technical analysis tool that measures the speed and strength of a price movement by comparing later prices to earlier ones. It is calculated as a percentage of the latest price compared to the price a number of periods ago. It is usually displayed as a line on a chart with a vertical axis representing magnitude and a horizontal axis representing time. The slope of the oscillator is proportional to the speed and strength of the movement. It is used to signal overbought or oversold conditions as well as points at which investors may wish to buy or sell.

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#13
Posted 05 September 2012 - 03:02 AM

i used this indicator together with bolinger bank . But it show me the right signal in short term and percent succeed is not high.With long term i often enter market when this indicator in over buy (> 70) or over sell ( < 30). But conclusion also is not good. So i have not used this indicator now.

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#14
Posted 15 October 2012 - 10:32 AM

The Stochastic Oscillator is a momentum indicator that shows the location of the close relative to the high-low range over set number of periods. according to an interview with lane, the Stochastic Oscillator does not follow price, it does not follow volume or anything like that.it follows the speed or the momentum of price. as a rule the momentum changes direction before price. as such bullish and bearish divergences in the Stochastic Oscillator can be used to foreshadow reversals. this was the first and most important, signal that lane identified. lane also used this Oscillator to identify bull and bear set-ups to anticipate a future reversal. because the Stochastic Oscillator is range bound, is also useful identifying and oversold levels.

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#15
Posted 09 December 2012 - 11:12 AM

stochastic Oscillator is a scalping indicator. who enjoy to trade scalping then stochastic oscillator is the best choice for him. 8-3-3 is the best form of stochastic oscillator. when bands up on 80 then u can get sell signal and when bands down from 20 then you can get buy signal. you can also add level by customize the indicator.

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#16
Posted 14 January 2013 - 04:04 PM

Sometimes with some strategy you can use it for scalping but it will give you more fault signals the best way to use this indicator is with H4 time frame here will give you clear signals and you can enter with low fear of loosingstochastic Oscillator is a scalping indicator. who enjoy to trade scalping then stochastic oscillator is the best choice for him. 8-3-3 is the best form of stochastic oscillator. when bands up on 80 then u can get sell signal and when bands down from 20 then you can get buy signal. you can also add level by customize the indicator.

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#17
Posted 02 December 2014 - 07:39 AM

ATR breakout strategy is a strategy that utilizes information from the market activity of ATR indicator to determine the breakout. On the basis of the current market will move strong, it is possible to penetrate the boundaries of psychological level (support and resistance)

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#18
Posted 23 May 2015 - 06:07 AM

One of the best indicator that many people used up to now and also time proven i mean that many people test and do research find out that in longer term stochastic osciliator doing well around up to 80% usually at around 70% in shorter term it will be lower, around average 60%.

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#19
Posted 27 March 2016 - 05:30 AM

stochastic oscillator is one of the most Important indicators in the MT I myself use it on my charts and have noticed that it is a useful indicators as it not only helps us to take a position but also tells us if the market instrument is in an oversold or overbought area